What the consumer sentiment survey suggests about differences in Irish households’ capacity to handle the financial costs of Covid-19

Analysis by Austin Hughes and Shawn Britton

The KBC Bank April consumer sentiment survey showed a sharp but not surprising drop in Irish consumer confidence. The clear message of the April sentiment  survey was that the economic and financial effects were being felt very broadly across Irish consumers.

Some supplementary questions in the April consumer sentiment survey suggest that like the virus itself, the economic fallout is impacting some consumers much more severely than others. Responses to these questions provide some potentially important insights into the spread and scale of problems now being faced by Irish households and what that might mean in terms of framing policy responses that are both efficient and equitable.

Significantly,  the additional questions asked in conjunction with the April consumer sentiment  survey suggest that the capacity of Irish consumers to weather the current financial storm varies markedly. Roughly one in eight consumers could handle a financial emergency costing €1,000 from current income whereas almost as many would be completely unable to finance such a difficulty through any means. This result suggests while the 'macro' impact of the current crisis is broadlyfelt, the severity of 'micro' impacts varies markedly across households.

The survey also highlights that while much of the discussion in terms of the direct demographic impact of the Coronavirus focusses towards either end of the age spectrum, the main economic and financial impact is currently being felt by those in the 35-54 age group, likely reflecting greater financial commitments that this group may have.

How would Irish consumers handle a financial emergency?

One supplementary question asked in the April survey gives a strong sense that the capacity of Irish consumers to weather the economic and financial storm stemming from the Covid19 crisis varies widely across households with potentially significant implications for the required policy response. Another supplementary question highlights the speed and scale with which conditions have changed of late. This means that issues identified as problematic risks in the March survey had transformed into a painful reality in the April responses. 

The April consumer sentiment survey contained  a special question focussed on the financial resilience of Irish consumers. It asked how consumers would handle an unexpected financial emergency amounting to €1,000. The question is based on one asked by the US Federal Reserve in its annual survey of the financial wellbeing of US households.

While the nature of the current crisis is notably different to a once-off financial difficulty, the responses may give some sense of divergences in the financial capacity of different consumers to deal with current financial pressures.  

The results of the survey of Irish consumers, shown in the diagram below, suggest that:

• Just under half would weather a financial emergency either by using their current income (12% of consumers) or by dipping into their existing savings (33%).    
• About one in four consumers (27%)  would borrow to pay for an unexpected emergency with about a third of these using a credit card for that purpose.
• About one in ten would borrow from a family member or friend
• About one in twenty to sell something
• Just under one in ten say they would be unable to handle a financial difficulty of this size at present while about half that number would use a financial lender other than a bank or credit union.

Among  those unable to pay an unexpected expense of this size at present:

• The share of respondents outside Dublin was higher than in the capital
• The age group showing greatest strains was those aged 35-54, presumably reflecting the range of pre-committed outgoings related to housing and children
• As expected, these responses were negatively correlated with income levels

These results emphasise the degree to which financial circumstances vary across Irish consumers. While the survey question was scheduled and intended to relate to circumstances very different from those currently prevailing. However, with a range of Government support measures providing significant support, the framing of the question may give some sense of the capacity of Irish consumers to handle sharply increased pressure on their household finances.

How much have conditions changed and which consumers felt it most?

In the March consumer sentiment survey, we asked a question which aimed to capture the extent to which prospective economic and financial costs of the coronavirus had entered into consumer thinking. The March survey results showed that the vast majority of Irish consumers (86%) realised that the coronavirus would have some impact on the Irish economy as a whole. However, the details suggested that the scale of impact would not translate directly  to their own household finances, as slightly more than half (57%) said the coronavirus would have an effect on their own financial circumstances.

We asked the same question in April and found that in the intervening weeks, Irish consumers have now come to see the impact that the coronavirus on their household finances would be as marked as that on the Irish economy as a whole. In general, the results show:

• In March, about three in five (62.9%) of consumers thought that the coronavirus would have substantial or somewhat large effect on the Irish economy. By April, this had increased sharply to nearly universally felt, with nearly nine in ten (87.9%) consumers giving this response.
• In March, about one in every three consumers (32.5%) thought the coronavirus would affect their household finances either substantially or somewhat. By April, this proportion had virtually doubled  to about three in every five consumers (63.3%).

Between March and April, the gap between those who thought the coronavirus would have an effect, whether slight or substantial, on the Irish economy and those who thought it would have an effect on their household finances narrowed from 29 percentage points in March to 10 percentage points in April. While the percent of those who thought the Irish economy would be affected increased marginally from 86% in March to  96% in April, this gap was narrowed mostly due to the increase in household finance impacts rising from 57% in March to 86% in April.

Perspectives on both the Irish economy and consumers’ household finances do vary somewhat according to the age of consumers. In general, while older consumers see a larger impact on the Irish economy as a whole when compared to younger age cohorts, younger consumers tend to think the coronavirus will have a larger impact on their household finances.

• In March, results were broadly similar in terms of the impact that coronavirus might have on the Irish economy. For all age groups, about three in every five Irish consumers thought the coronavirus would have a substantial or somewhat large effect.
• In April, there was a slight divergence as about nine in every ten (91%) of those aged 55 or older thought the coronavirus impact on the Irish economy would be substantial or somewhat large, compared to about eight in every ten (83%) for those between the ages of 18 and 34.
• In March,  nearly two in every five (38%) of those between the ages of 35 and 54 thought that coronavirus would have a substantial or somewhat large effect on their household finances. This compares to one in every three (33%) of those aged 18 to 34 and just one in every four (25%) of those aged 55 years or older.
• In April, these figures doubled. Seven out of every ten (71%) of those between 35 to 54 years old said the coronavirus would have a substantial or somewhat large effect, compared to two in every three (66%) of those aged between 18 and 34 years old and one in every two (52%) of those aged 55 or older.Overall, the results of April’s survey show that only marginally more Irish consumers envisage the coronavirus will have a negative impact on the Irish economy as a whole than was the case in March but a sharply larger number of consumers now envisage a negative impact on their own household finances than a month ago. This is reasonable adjustment in expectations, as the weeks in between the two survey periods saw the introduction of more stringent lockdown measures. Broadly speaking, Irish consumers from all regions tend to give similar weights to the effect of the coronavirus. However, the data suggest that age differences, possibly a proxy for job security, financial security, or a mixture of both, means that those who are likely juggling young children and significant financial commitments are more pessimistic about their own household finances.

• Some policy implications?

  One possible implication of substantial differences in financial circumstances is that policy responses should focus on where they may be most sorely needed. This might suggest that both in terms of ‘respite’ and ‘recovery’ measures any emphasis on ‘helicopter money’ type measures for households would both be inefficient and inequitable (the nature of support for businesses may need to be scoped  differently). 
  
  In a recovery context, this might suggest that the primary focus should be on measures that would replenish household spending power rather than replace reduced savings. Boosting the spending power of all households by the same amount through some 'helicopter' type measure would entail significant 'deadweight' costs in respect of monies given to those households not materially affected and would also constrain the resources available to those most in need.   
  
  As both the power and propensity to spend seem set to vary markedly across Irish consumers, fiscal resources should be targetted towards underpinning and improving the prospects of those whose incomes were hit hardest, who, in many instances, were also those least  capable financially of weathering the current economic storm. Failing to do because of exaggerated concerns about the public finances is unlikely to be sustainable in economic or social terms.